Issue Date
June 2, 2010
Audit Report Number
2010-LA-1011
TO: Maria F. Cremer, Acting Director, San Francisco Office of Community Planning
and Development, 9AD
FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: Sacramento Housing and Redevelopment Agency Did Not Always Administer
the Neighborhood Stabilization Program in Accordance With HUD Rules and
Regulations
HIGHLIGHTS
What We Audited and Why
We audited the Sacramento Housing and Redevelopment Agency (Agency) as a result of
a hotline complaint, which alleged violations of Neighborhood Stabilization Program
(program) funds provided through the Housing and Economic Recovery Act of 2008.
Our objective was to determine whether the alleged violations had merit. The complaint
alleged several instances where the Agency did not follow program rules and regulations,
including but not limited to, rehabilitating residential properties that were not foreclosed
upon or vacant and/or abandoned. We wanted to determine whether the Agency
administered its program in accordance with U.S. Department of Housing and Urban
Development (HUD) rules and regulations and whether program funds were used for
eligible purposes.
What We Found
The Agency did not administer the program in accordance with HUD rules and
regulations. Specifically, it
Allowed ineligible properties to be rehabilitated.
Did not adequately monitor projects, which resulted in ineligible costs.
Permitted the developer to make unnecessary upgrades and overinflate the
construction budget.
Did not ensure that it met its reporting requirements when reporting to the
Disaster Recovery Grant Reporting system.
Lacked controls, which resulted in more than $5.3 million dollars in funds that
could be put to better use.
We attribute these deficiencies to the Agency’s not following program requirements,
compounded by a lack of policies and procedures and ineffective management controls
over the program.
What We Recommend
We recommend that the Director of the San Francisco Office of Community Planning
and Development require the Agency to repay from non-Federal funds more than $1.1
million in ineligible expenditures. Additionally, we recommend that the Agency be
required to establish and implement effective procedures and management controls to
ensure that all program-assisted projects are adequately monitored and that budget
allocations and expenditures are reasonable and necessary in accordance with HUD rules
and regulations because such corrective actions would ensure that more than $5.3 million
in funds could be put to better use.
For each recommendation with a management decision, please respond and provide
status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us
copies of any correspondence or directives issued because of the audit.
Auditee’s Response
We provided our discussion draft report to the Agency on May 6, 2010, and held an exit
conference on May 13, 2010. The Agency generally disagreed with our report findings.
The complete text of the auditee’s response, along with our evaluation of that response,
can be found in appendix B of this report.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: The Agency Allowed Ineligible Properties To Be Rehabilitated Using 5
Program Funds
Finding 2: The Agency Did Not Adequately Monitor Its Program Projects 8
Finding 3: The Agency Failed To Meet Its Reporting Requirements 17
Scope and Methodology 19
Internal Controls 21
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 22
A-1 Schedule of Funds to Be Put to Better Use 23
A-2 Schedule of Unsupported Labor and Material Costs 25
A-3 Schedule of Ineligible Administrative Costs 26
A-4 Schedule of Ineligible Costs and Funds To Be Put to Better Use for Five 27
Ineligible Properties
B. Auditee Comments and OIG’s Evaluation 28
C. Criteria 37
3
BACKGROUND AND OBJECTIVE
The Neighborhood Stabilization Program (program) was authorized under Title III of the
Housing and Economic Recovery Act of 2008 (Act) and provides grants to every State and
certain local communities to purchase foreclosed-upon or abandoned homes and to rehabilitate,
resell, or redevelop the homes to stabilize neighborhoods and stem declining values in
neighboring homes. The Act calls for allocating funds “to states and units of general local
government with the greatest need.” In the first phase of the program, the U.S. Department of
Housing and Urban Development (HUD) allocated $4 billion in program funds to assist in the
redevelopment of abandoned and foreclosed-upon homes.
The housing authorities for the City and County of Sacramento are legal entities that operate
under the umbrella organization of the Sacramento Housing and Redevelopment Agency
(Agency). The Agency is a “joint powers authority” of the City and County of Sacramento to
represent both jurisdictions for affordable housing and community redevelopment needs.
On January 30, 2009, HUD approved more than $18.6 million for the County of Sacramento.
These funds are being used to return foreclosed-upon or abandoned residential properties to
occupancy as quickly as possible; revitalize neighborhoods through strategic redevelopment,
rehabilitation, and reuse of vacant properties; and provide affordable homeownership and
improved affordable rental opportunities.
Specifically, the Agency began implementing three HUD-approved activities with its program
funds for the County of Sacramento, along with the use of funds for program administration.
Activity name Description Eligibility Funds Allocated
Vacant Designed to return vacant and Section 2301(C)(3)(B) $5,500,000 (inclusive of
Properties blighted homes and properties to the Pilot Preforeclosure
Program (VPP) owner occupancy. Initiative)
Block Addresses some of the blighted Section $8,000,000 ($4 million
Acquisition/ conditions in specific targeted 2301(C)(3)(A) and for the Lerwick Project
Rehabilitation areas. 2301 (C)(3)(B) and $4 million for the
(BAR) Norcade Circle Project)
Property Designed to either consist of a Section $3,305,460
Recycling government, affiliate, or private 2301(C)(3)(A),
Program (PRP) entity. 2301(C)(3)(B), and
2301(C)(3)(C)
Program n/a n/a $1,800,000
administration
Total $18,605,460
Audit Objective
Our objective was to determine whether the alleged violations from a hotline complaint had
merit. Specifically, we wanted to determine whether program funds were used for eligible
purposes.
4
RESULTS OF AUDIT
Finding 1: The Agency Allowed Ineligible Properties To Be
Rehabilitated Using Program Funds
Five ineligible properties were rehabilitated using program funds. This condition occurred
because the Agency did not follow program requirements. As a result, nearly $1 million was
spent on the rehabilitation of properties that were acquired before submission of an action plan
amendment.
Ineligible Properties
HUD’s guidance and sections 2301 (c)(3)(A) and (c)(3)(B) of Public Law 110-289
require that properties be acquired after submission of an action plan substantial
amendment (amendment) and be foreclosed upon or abandoned (see appendix C). The
Agency submitted its amendment on November 26, 2008, and HUD approved more than
$18.6 million for the County of Sacramento on January 30, 2009. The Agency provided,
in the form of a forgivable loan, more than 40 percent ($8 million) of the grant to one
developer without competition.
The developer was using the funds to rehabilitate 1 project involving 32 apartment units.
The project involved 8 four-unit buildings consisting of 3,624 square feet per building.
The developer planned and the Agency approved substantial renovations, including the
replacement of siding, installing vinyl windows, resurfacing the parking lot, and
replacing fencing. There would also be new electrical panels, insulation, exterior
lighting, and roofing. In addition, the interior would include new appliances, flooring,
countertops, and cabinets.
Five Properties Were Purchased Before the November 26, 2008 Amendment
The developer purchased five properties listed in the table below before the action plan
amendment was submitted and approved by HUD. The purchase dates ranged between
July 14 and September 19, 2008. The Agency budgeted and later obligated $500,000 in
rehabilitation1 costs for each property for a total of $2.5 million for all five. The amount
obligated included costs for rehabilitating the interior and exterior of the buildings and
other items such as dry rot repair, hazardous material mitigation, and demolition.
1
At a later date, the Agency indicated that $500,000 included soft costs.
5
According to Agency reports, $982,8202 had been expended related to the rehabilitation
of the ineligible properties as of December 31, 2009.
Parcel number Purchase (recording) date Allocation of program
funds
1 254-0133-015-0 7/14/2008 $500,000
2 254-0133-017-0 7/18/2008 $500,000
3 254-0133-013-0 8/18/2008 $500,000
4 254-0133-036-0 9/17/2008 $500,000
5 254-0133-016-0 9/19/2008 $500,000
Total $2,500,000
One Property Was Not Foreclosed upon or Abandoned
In addition, one property that was not foreclosed upon or abandoned was rehabilitated.
The property was purchased from an individual and the Agency obligated $500,000 for
rehabilitation (see table below). At the time of the review, acquiring properties from an
individual was not allowed. However, on April 2, 2010, guidance was issued revising the
definition of foreclosed and abandoned properties to allow this. This is included in the
report since it was an ineligible acquisition at the time of the review.
Assessor parcel number Purchased (recording) date Allocation of program
funds
1 254-0131-029-0 12/24/2008 $500,000
The Agency was aware that this property was not eligible under its eligible uses detailed
in its amendment. As a result, it changed the use without prior HUD3 approval to
redevelop demolished or vacant properties (see appendix C).
Conclusion
The agency allowed the developer to use program funds for five ineligible properties.
This condition occurred because the Agency failed to comply with program rules and
regulations. Accordingly, nearly $1 million was spent on rehabilitating the five ineligible
properties. In addition, reprogramming the unspent obligated program funds allocated to
the five properties would enable more than $1.5 million in funds be put to better use (see
appendix A-4).
2
There have been seven properties purchased to date, and two were eligible. The amount reflects a prorated amount
of program funds expended on 5 of the ineligible properties: According to Agency records, $1,375,945 was spent /7
properties = $196,564 x 5 ineligible properties = $982,820 (see appendix A-4). The prorated amount was used
because the Agency did not maintain separate expenditures for each of the properties.
3
On December 9, 2009, we contacted the community planning and development representative for the program and
were informed that other than revising its budget and making programmatic changes such as decreasing the numbers
to be assisted, it did not change the content of the substantial amendment.
6
Recommendations
We recommend that the Director of the San Francisco Office of Community
Development and Planning require the Agency to
1A. Repay HUD from non-Federal sources $982,820 spent on rehabilitating ineligible
properties.
1B. Reallocate the unspent $1,517,180 to other program-approved projects or return
the funds to HUD.
7
Finding 2: The Agency Did Not Adequately Monitor Its Program
Projects
The Agency did not adequately monitor its program projects. Specifically, it approved
unreasonable and unnecessary upgrades and construction budgets, a loan with excessive finance
costs, ineligible and unsupported costs, and did not ensure that appraisal and environmental
reviews were performed in accordance with program requirements. These deficiencies occurred
because the Agency lacked effective management controls to ensure compliance with all of the
applicable HUD requirements. As a result, there was more than $3.9 million in ineligible costs
and funds to be put to better use.
Unnecessary Upgrades and
Inflated Budget
Appendix A of 2 CFR 225 (c)(1)(a) state that costs must be necessary and reasonable for
proper and efficient performance and administration of Federal awards (see appendix C).
However, the agency approved $500,000 to be allocated for the rehabilitation of each of
the eight fourplexes. The unnecessary upgrades and inflated budgets were as follows:
Lerwick Road Properties
An individual certified by the California Department of Health Services prepared an
environmental report on the Lerwick properties, which showed the following:
Structure interior is in good condition and should remain so with good
housekeeping and maintenance;
Interior ceilings, walls, trims, baseboards, and door painted surfaces were in
generally good to excellent condition;
The general condition of the structures is good to excellent.
Below are pictures of a Lerwick unit that had not been rehabilitated and was used as an
office by the developer. As shown in the photographs, the interior and exterior condition
of the subject property was in fair to good condition. These items were included in the
approved final construction budget to be replaced or reconfigured.
8
9
Norcade Circle Properties
In addition to the Lerwick Road properties, the developer was still preparing the final
scope of work for the Norcade Circle properties involving 32 apartment units. The
project involved four-unit buildings consisting of 3,476 square feet per building.
Although the final scope of work was still in progress as of the end of our field work, the
Agency had approved each fourplex to be allocated $500,000 in program funds for
acquisition and rehabilitation. We determined that the budgeted amounts for the proposed
rehabilitation were unreasonable and included unnecessary upgrades based on the market
value. The market value was $190,000 based on an average of the appraisals, most of
which were performed after the purchases. At that time, the scope of work was planned
to include replacing all countertops, sinks, and bathtubs and reconfiguring kitchen
cabinets to make use of wasted space. Not all of the fourplexes (or units) required the
upgrades. The pictures below were taken from various fourplexes during our site visit.
10
As shown in the above and below photographs, the building and its units were in good condition.
The flooring and kitchen cabinets from a unit in another building revealed that they did not need
to be replaced.
11
The kitchen cabinets, bathtub, and refrigerator were all in fair condition and did not need to be
replaced as suggested.
Based on the HUD Office of Inspector General (OIG) appraiser’s inspection and
evaluation, rehabilitation could be accomplished with less than $100,000 per fourplex for
each of the eight buildings. In addition, we proposed acquisition costs to be allocated no
more than $200,000 for each of the 3 buildings it planned to purchase with program
funds. Therefore, we recommend that the Agency allocate no more than $1.4 million for
the entire Norcade project, to include sufficient funding for acquisition and rehabilitation
to be performed by the developer under proper monitoring by the Agency and following
all applicable regulations. Since it allocated $4 million to the project, improvements to
its controls would allow $2.6 million in funds to be put to better use (see appendix A-1).
Excessive Profit and Overhead
The Agency approved the construction company (owned by the developer) to earn 20
percent in profit and overhead when the average for similar projects averaged about 9.62
percent for other developers. The Agency also did not reimburse the developer based on
actual expenditures; rather, it was based on percentage of completion. This method
provided the developer/construction company the opportunity to earn more profits by
incurring more expenses (including some unnecessary expenses). Since the amount of
12
profit and overhead (20 percent) is calculated based on its expenses, the higher the costs
incurred, the more profit the developer stood to gain.
Poor Monitoring
The Agency also allowed its finance analyst to fill in and approve labor and material
costs when the construction technician was on leave. The analyst and immediate
supervisor acknowledged that the analyst did not have construction experience nor an
understanding of what costs were necessary and reasonable.
The approved Lerwick Road construction budget was not reasonable because the funds
invested in each of the properties were disproportionate to the market value and included
unnecessary upgrades. For the Lerwick Road properties, the market value for each
fourplex was approximately $250,000, which was determined by averaging the purchase
price for each of the properties because only one appraisal was performed more than
eight months after the purchase. Improvements to the Agency’s management controls to
ensure that construction budgets and costs are reasonable and necessary would enable
$1.2 million (see appendix A-1) in program funds to be put to better use in the future.
Excessive Finance Costs
According to Federal requirements cited previously, allowable costs for Federal awards
must meet the general criteria of necessary and reasonable for proper and efficient
performance and administration of Federal awards and be adequately documented (see
appendix C). On June 11, 2008, the Agency approved a loan agreement which allowed
the developer to borrow $1.5 million from a private lender to purchase various parcels
along Lerwick Road. However, it neglected to ensure that the finance cost of the loan
was reasonable and necessary.
The loan permitted the lender to immediately earn 10 percent ($150,000) as an
origination fee, and, therefore, the loan was recorded at $1.65 million. In addition, the
loan amount accrued an annual interest rate of 12 percent compounded monthly. When
the loan became overdue, the lender earned additional interest on the loan. Ultimately,
the private lender earned $392,500 in 15 months for a total return on investment rate of
26.17 percent. However, only $107,053 was charged to program funds. Based on our
analysis of the Agency’s records, these funds were charged to the Norcade project. But,
because the agreement was for the Lerwick property, $107,053 was ineligible (see table
below).
Norcade Circle project Program funds
July 9, 2009 $ 74,202.67
August 11, 2009 $ 13,657.12
September 23, 2009 $ 19,193.37
Total $ 107,053.16
13
Unsupported and Ineligible
Costs
Labor and Material Costs
According to, Appendix B of 2 CFR 225(h)(1) charges to Federal awards for salaries and
wages will be based on documented payrolls (see appendix C). We reviewed the agency
documentation of Lerwick Road expenditures, including construction company payroll
records, and determined that $260,5464 spent for labor and material was unsupported
(see appendix A-2). The process used by the Agency to review labor and materials was
insufficient. It did not verify that the expenses submitted by the developer and/or its
construction company were properly supported and for actual expenses as required.
Instead, the Agency approved costs based on percentage of completion. There were few
records showing actual expenditures as required. When records were available, they did
not adequately track expenditures. The construction technician who administered the
project stated that the spreadsheet he used was inaccurate and, thus, would not provide it.
He also stated that he was not proficient in the spreadsheet software.
Administrative Costs
According to HUD’s guidance, for-profit developers may not incur administrative costs
but may charge fees and earn profits (see appendix C). The Agency allowed the
developer to earn $1,000 per week in administrative costs for the Norcade Circle projects
where the developer’s fee had been budgeted for $425,000. The developer billed $31,000
of which nearly 80 percent was charged to the program. Based upon our analysis of the
Agency’s records, $24,714 (see appendix A-3) of the claimed cost was ineligible. The
administrative invoices submitted by the developer did not detail any accomplishments;
rather, it was an automatic payment to the developer for the Norcade Circle projects.
Appraisal and Environmental
Requirements Not Met
According to 74 Federal Register 29225 and 73 Federal Register 58331 the purchase
price of a foreclosed-upon home or residential property must reflect a discount from the
current market value of the property and appraisals must be performed 60 days before an
offer is made for the property (see appendix C). In addition, 24 CFR 58.30(b) states that
the environmental review process should begin as soon as a recipient determines the
project’s use of HUD funding.
4
In finding 1, we determined that five of the Lerwick properties were ineligible. As a result, the unsupported costs
of $260,546 have been included in the ineligible expenses questioned in finding 1 and not included as questioned
costs for finding 2 to avoid duplication.
14
Several properties were purchased without the required appraisals and environmental
reviews. For example, the Agency used program funds for the acquisition of two
Norcade Circle properties that had appraisals either conducted after or a day before the
purchase (recording) date. See property number 2 in the table below. It is difficult to
conclude the real current market value of a property when appraisal values are not known
before the purchase.
Assessor parcel Purchase Acquisition Purchased Appraisal
number5 amount amount (recording date
charged to date)
program
funds
1 075-0161-005-0 $180,000 $176,200 7/15/09 10/2/09
2 075-0161-007-0 $203,000 $207,719 10/20/09 10/19/09
Total $383,000 $383,919
Conclusion
The Agency lacked effective management controls to monitor its program grant in
accordance with pertinent grant requirements and regulations. Specifically, it failed to
properly account for and manage its grant funds. These weaknesses resulted in more than
$3.9 million in ineligible costs and funds to be put to better use. Accordingly, HUD had
no assurance that program funds were used only for authorized and allowable expenses.
5
The two properties were awaiting environmental reviews.
15
Recommendations
We recommend that the Director of the San Francisco Office of Community
Development and Planning require the Agency to
2A. Take action to implement management controls to ensure that funds budgeted and
expended are reasonable and necessary. Such corrective action will ensure that
$3.8 million in program funds can be put to better use.
2B. Repay HUD from non-Federal sources $107,053, which it expended on ineligible
finance costs.
2C. Repay HUD $24,714 from non-Federal sources for ineligible administrative costs.
16
Finding 3: The Agency Failed To Meet Its Reporting Requirements
The Agency failed to meet its reporting requirements for activities funded by the program. This
condition is due to a decision made by management to not report any expenditure in the Disaster
Recovery Grant Reporting system (reporting system) until the conclusion of this audit to ensure
that funds reported did not include ineligible expenses. In addition, the Agency did not have
policies and procedures to ensure proper reporting of program funds. As a result, HUD was
unable to collect information to exercise proper oversight of the program to prevent fraud, waste,
and abuse of funds.
The Agency Failed To Report
Expenditures
Federal program requirements at 73 FR (Federal Register) 58331 state that each grantee
must submit a quarterly performance report, as HUD prescribes, no later than 30 days
following the end of each quarter. Each report will include information about the uses of
funds, including but not limited to
Project name, activity, location, national objective;
Funds budgeted and expended; and
Funding source and total amount of any nonprogram funds
Grantees must submit reports using HUD’s Web-based reporting system and, at the time
of submission, be posted prominently on the grantee’s official Web site. Contrary to the
requirements, not only did the Agency not upload the reports to its web site6, it also did
not report essential information about the projects to HUD. Further, it withheld
information when reporting on its quarterly progress reports; specifically the Block and
Acquisition Rehabilitation program for the County of Sacramento. As of the second
quarterly progress report, the Agency had not reported any expenditures even though
expenses were already being incurred.
Consequently, the Agency was not being transparent to HUD and the public on how the
funds were spent. The problem occurred because management decided not to report draw
downs or expenditures until the audit was complete to ensure that funds reported in the
system did not include ineligible expenses. It also did not have policies and procedures
in place to ensure that reporting requirements are met as required by program
requirements.
6
To date, the Agency has only published a “report card” on its Web site, dated October 2009. The Agency uses the report card as a system for
distributing information to the public to show how the Agency is meeting its program and project goals. However, the information in the report
card did not reflect up-to-date information and lacked the specific details on how the programs funds were allocated and expended.
17
Corrective Action
We informed agency management that it is a violation of program requirements to
withhold information in its quarterly progress reports. The staff explained that the
agency did not want to report any expenditure that could be ineligible. As a result, it
decided to not report any expenditure in the system until the audit was complete. Since
we determined that the Agency was noncompliant, management stated that it would
report expenditures in its third quarterly progress report. We verified that the Agency
had begun to comply with this requirement.
Conclusion
The Agency did not meet reporting requirements because it lacked policies and
procedures to ensure proper reporting of its program-assisted projects as required. The
problem was compounded by the fact that management decided not to report any
expenditure until the audit was complete to ensure that program funds reported in the
system did not include ineligible expenses. As a result, the Agency was not being
transparent about its program funds used. Without proper reporting, HUD cannot
adequately exercise proper oversight of the program to prevent fraud, waste, and abuse of
funds.
Recommendation
We recommend that the Director of the San Francisco Office of Community Planning
and Development require the Agency to
3A. Develop and implement policies and procedure to ensure proper reporting in the
reporting system and posting to its web site as required.
18
SCOPE AND METHODOLOGY
We performed our onsite audit work at the Agency, located in Sacramento, CA, between October
and December 2009. Our audit generally covered the period from October 1, 2008, through
October 31, 2009. We expanded our scope as necessary.
To accomplish our objective, we reviewed
The Act
The program bridge notice, dated June 19, 2009
73 FR 58331
HUD regulations at 24 CFR Parts 85, 92, and 570
2 CFR 225
The Davis-Bacon Act
OMB Circular A-133
The Agency’s substantial amendment to its 2008-2009 action plan for the County of
Sacramento
The program grant agreement, approved January 30, 2009
Organizational charts
HUD monitoring reports
HUD’s reporting system
The single audit report for the year ending December 31, 2008
The Agency’s internal policies and procedures that support program activities. We also
reviewed the Agency’s financial management, procurement, and monitoring policies and
procedures
The Agency’s loan agreements, owner participation agreements, staff reports related to
the review of our audit
We did not use the Agency’s computerized data with the exception of reports generated
from its accounting system which we determined to be reasonably reliable. We reviewed
expenditure reports, journal vouchers, and supporting documentation related to the
projects selected for review
We also interviewed Agency staff and HUD employees and conducted site visits.
HUD approved three activities to be implemented with program funds. In order to determine
whether the allegations in the complaint had merit, we selected a nonstatistical sample of
projects under the Block Acquisition/Rehabilitation program for the County of Sacramento.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
19
evidence to provide reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
20
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are achieved:
Program operations,
Relevance and reliability of information,
Compliance with applicable laws and regulations,
Safeguarding of assets and resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objectives:
Administering the Neighborhood Stabilization Program in compliance with
HUD regulations.
Performing appropriate monitoring of the program.
Reporting obligations and expenditures of grant funds.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling program
operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses:
The Agency lacked controls to ensure funds were reasonable, necessary, and
eligible (Finding 1 and 2).
The Agency lacked management controls to ensure proper monitoring of its
program projects (Finding 2).
The Agency lacked policies and procedures to ensure proper reporting of
expenditures to HUD’s reporting system (Finding 3).
21
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS AND FUNDS
TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Funds to be put to
number better use 2/
1A $982,820
1B $1,517,180
2A $3,800,000
2B $107,053
2C $24,714
Total $1,114,587 $5,317,180
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations.
2/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an OIG recommendation is implemented. These amounts include
reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
implementing recommended improvements, avoidance of unnecessary expenditures
noted in preaward reviews, and any other savings that are specifically identified.
Implementation of our recommendations and improvement of controls would ensure $5.3
million in funds be put to better use that had not been spent as of December 31, 2009.
22
Appendix A-1
SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
Calculation of $3.8 million in funds to be put to better use.
Lerwick:
In finding 1, we determined that five of the eight Lerwick properties were ineligible for
rehabilitation using program funds. Therefore, we recommended that nearly $1 million be repaid
from non-Federal funds and more than $1.5 million be reprogrammed from eligible and
approved program projects. Consequently, based on our review, the eligible properties located
on Lerwick were assessor parcel numbers 254-0131-041-0000 and 254-0131-029-0000. There
was another potential property that could be eligible for program funding as well, but it was yet
to be acquired.
Assessor parcel Budget amount Proposed rehabilitation Difference (funds to be put
number (program funds) costs by HUD OIG to better use)
appraiser
A B A-B
1 254-0131-041-0000 $500,000 $100,000 $400,000
2 254-0131-029-0000 $500,000 $100,000 $400,000
3 Yet to acquire $500,000 $100,000 $400,000
Total $1,500,000 $300,000 $1,200,000
23
Norcade:
Based on the results from the HUD OIG appraiser’s evaluation, a proper rehabilitation could be
accomplished with less than $100,000 per fourplex. In addition, the market value for the
properties located at Norcade Circle is about $190,000. To be conservative, we proposed
acquisition for each of the property to be $200,000 per building. Consequently, we recommend
the following as funds to be put to better use.
Accessor parcel Acquisition Rehabilitation Program HUD OIG HUD OIG
number program program funds proposed proposed
funds funds eligible proposed acquisition rehabilitation
eligible (Y/N) budget per
(Y/N) building by
Agency
1 075-0162-006-0 Yes Yes $500,000 Not applicable $100,000
– purchased
with non-
Federal funds
2 075-0161-017-0 Yes Yes $500,000 Not applicable $100,000
– purchased
with non-
Federal funds
3 075-0161-006-0 Yes Yes $500,000 Not applicable $100,000
– purchased
with non-
Federal funds
4 075-0161-005-0 Yes Yes $500,000 $200,000 $100,000
5 Yet to acquire No Yes $500,000 Not applicable $100,000
6 Yet to acquire No Yes $500,000 Not applicable $100,000
7 075-0161-007-0 Yes Yes $500,000 $200,000 $100,000
8 Yet to acquire Yes yes $500,000 $200,000 $100,000
Total $4,000,000 $600,000 $800,000
$4,000,000 - $1,400,000 = $2,600,000
Summary
Project Funds to be put
to better use
Lerwick $1,200,000
Norcade $2,600,000
Total $3,800,000
24
Appendix A-2
SCHEDULE OF UNSUPPORTED LABOR AND MATERIAL
COSTS
HUD OIG review Amount paid
by Agency for
each draw
request
Draw Actual labor Actual Total Amount paid Total:
number materials unsupported
costs
A B C D E
(A+B) (D-C)
4+5 $55,813.96 $242,555.10 $298,369.06 $401,462.61 $103,093.55
6 $73,306.79 $203,157.01 $276,463.80 $325,186 $48,722.20
8 $165,161.21 $164,374.68 $329,535.89 $221,197 ($108,338.89)
10 $68,129.39 $20,514.58 $88,643.97 $162,073.13 $73,429.16
11 $125,823.61 $12,241.35 $138,064.96 $98,282.39 ($39,782.57)
13 $27,510.81 $50,163.95 $77,674.76 $261,097.64 $183,422.88
Total $515,745.77 $693,006.67 $1,208,752.44 $1,469,298.77 $260,546.33
Note: In finding 1, we determined that five Lerwick properties were ineligible. To avoid
duplication of questioned costs, we did not include $260,546 as unsupported costs but merely
point out that the Agency lacked the necessary controls to administer its program.
25
Appendix A-3
SCHEDULE OF INELIGIBLE ADMINISTRATIVE COSTS
Date Administrative costs
charged to program
funds
7/9/09 $9,000
8/11/09 $4,800
9/23/09 $1,600
9/24/09 $1,600
11/30/09 $5,143
11/30/09 $2,571
Total $24,714
26
Appendix A-4
SCHEDULE OF INELIGIBLE REHABILITATION COSTS FOR
FIVE INELIGIBLE PROPERTIES AND FUNDS TO BE PUT TO
BETTER USE
Amount expended on each property
A B A/B = C
Expended Number of (Prorated)
amount as properties amount spent on
of 12/31/09 purchased each property
$1,375,945 7 $196,564
Ineligible costs
A B AxB=C
(Prorated) Ineligible Ineligible Ineligible
amount properties for property for rehabilitation
spent on the rehabilitation: not costs
each rehabilitation: foreclosed upon
property purchased or abandoned
before
amendment
$196,564 5 $982,820
Total $982,820
Funds to be put to better use
A B AXB=C D C–D=E
Budgeted Number of Total Ineligible Funds to be put to
amount ineligible expenses better use
per properties for
property rehabilitation
$500,000 5 $2,500,000 $982,820 $1,517,180
As authorized by 24 CFR 570.910(b)(2)(iii), we recommend that more than $1.5 million be
reprogrammed to other eligible program activities for funds to be put to better use. If not,
return funds to HUD.
Note: We prorated the amount because the Agency did not maintain separate expenditures for
each of the properties.
27
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
28
Comment 3
Comment 4
Comment 5
29
Comment 6
Comment 7
Comment 8
Comment 9
Comment 10
Comment 11
30
Comment 12
Comment 13
31
Comment 14
Comment 15
Comment 16
Comment 17
32
33
OIG Evaluation of Auditee Comments
Comment 1 We disagree that the findings do no appropriately account for the intent of the
Housing and Economic Recovery Act (HERA) legislation and our review did take
into account the limitations of HUD’s reporting system when citing the Agency
for non-compliance. In addition to initially not reporting program data, we
identified rehabilitation of ineligible properties, unreasonable and unnecessary
expenditures and a lack of adequate monitoring.
Comment 2 We agree that the NSP was established for the purpose of stabilizing communities
that have suffered from foreclosures and abandonment. However, the Agency
was responsible for ensuring that program funds were used in accordance with all
program requirements, as required by 24 CFR 570.501(b). In addition, in order to
be allowable under federal awards, costs must have been necessary and
reasonable for proper and efficient performance and administration of Federal
awards as required by Appendix A of 2 CFR 225 (c)(1)(a). Based on our audit
fieldwork and as shown in this report, it was apparent that the Agency did not
administer the program in accordance with HUD rules and regulations.
Comment 3 We disagree. Our findings are based on the results of our audit work.
Comment 4 In order to determine whether the allegations in the hotline complaint had merit,
we selected a nonstatistical sample of projects under the Block Acquisition
Rehabilitation program for the County of Sacramento.
Comment 5 We disagree that implementing "…a comprehensive plan to make neighborhoods
more stable, sustainable, competitive and integrated..." involves unnecessary and
unreasonable rehabilitation costs for the two projects.
Comment 6 We disagree. As outlined in finding 1, properties were purchased prior to the
submission of an action plan (amendment); thus, no longer foreclosed-upon or
abandoned, as required. As a result, the ineligible properties were not eligible for
rehabilitation using program funds. In addition, according to HUD's guidance,
NSP acquisitions are not authorized to begin until the grantee has submitted an
action plan amendment to HUD which was determined to be November 26, 2008.
Comment 7 According to the Agency's substantial amendment, eligible use for the HUD-
approved program Block Acquisition/Rehabilitation program for both Lerwick
and Norcade Circle was under eligible use sections 2301 (c)(3)(A) and (c)(3)(B)
of Public Law 110-289. This required that the properties be foreclosed upon or
abandoned. As stated in Comment 6, properties purchased prior to submission of
an amendment were considered no longer foreclosed-upon or abandoned. In
addition, HUD approved $18.6 million based on the Agency's substantial
amendment of eligible use sections 2301(c)(3)(A) and (c)(3)(B).
34
According to program regulation 24 CFR 570.463(a), "applicants must submit to
the HUD Area Office and to Central Office all revisions to the application. A
revision is considered significant if it alters the scope..." In addition, 24 CFR Part
91.505(a)(3) states that the jurisdiction shall amend its approved plan whenever it
makes a change to the purpose, scope, location, or beneficiaries of an activity.
This was not done according to HUD representatives.
Comment 8 We agree that section 570.202, rehabilitation costs are an eligible activity.
However, the costs to rehabilitate ineligible properties are not eligible. See
comment 6.
Comment 9 We disagree. Our review identified numerous instances of ineffective
management controls to monitor its program grant in accordance with pertinent
grant requirements and regulations. Contrary to the requirement, the Agency
approved unreasonable and unnecessary upgrades and construction budgets, a
loan with excessive finance costs, ineligible and unsupported costs, and did not
ensure that appraisal and environmental reviews were performed in accordance
with program requirements.
Comment 10 The consultant that issued the report inspected the properties on September 29,
2008 which was at least five months before the rehabilitation started. Although
the consultant performed a limited review, his comments are based on visual
inspections of the buildings before any rehabilitation had taken place. As
required by section 58.40(a), the environmental assessment must "determine
existing conditions and describe the character, features and resources of the
project area and its surroundings..." which the consultant did. The consultant
described the general condition, at the time, which includes exterior walls as well
as interior ceilings, walls, trims, baseboards, and door painted surfaces. In
addition, the consultant indicated that the condition of the structures was good to
excellent. The Agency failed to have appraisals performed 60 days prior to an
offer made. In fact, only one of the Lerwick properties had an appraisal
performed which occurred eight months after the purchase. Thus, the only
accurate depiction of the properties would be by the consultant who conducted the
environmental review.
Comment 11 We disagree. According to Appendix A of 2 CFR 225(c)(2), a cost is reasonable
if, in its nature and amount it does not exceed what a prudent person would incur
under the circumstances prevailing at the time the decision was made (see
appendix C). The approved Lerwick Road construction budget was not
reasonable because the funds invested in each of the properties were
disproportionate to the market value and included unnecessary upgrades.
Comment 12 According to the Agency's Multifamily Lending Policies Exhibit 5: Rental
Property Minimum Construction Standards: General Conditions - It is not the
intent of the Agency to replace systems that appear to have some economic life
remaining and appear to be maintained and functioning effectively.
35
Based on our site inspections, there were appliances, kitchen cabinets, bathroom
and kitchen accessories that did not require upgrades. At the time of our
inspection, most of the items had been removed by the developer and there was
no documentation indicating the condition and functioning capability of any of
them at the time of removal. No records were provided to support that funds used
for replacement of the items were reasonable and necessary.
Comment 13 We disagree. According to 2 CFR 225(c)(1)(a) and 225(c)(1)(j), costs must be
necessary and reasonable for proper and efficient performance and administration
of federal awards and be adequately documented. As stated in the audit report,
the Agency approved a loan agreement which allowed the developer to borrow
$1.5 million from a private lender to purchase various parcels along the Lerwick
Road. However, it neglected to ensure that the finance costs of the loan were
reasonable and necessary because it permitted the private lender to earn $392,500
in 15 months for a total return on investment rate of over 26 percent. The
agreement was for the Lerwick property and not the Norcade property; thus,
$107,053 was ineligible.
Comment 14 According to HUD's guidance, for profit developers may not incur administrative
costs but may charge fees and earn profits. As discussed in the audit report, the
administrative invoices submitted by the developer did not detail any
accomplishments; rather it was an automatic payment to the developer for the
Norcade Circle projects. Documentation in the files showed the developer had
already submitted and received reimbursement for developer fees.
Comment 15 We reviewed the final closing costs statement provided by the Agency and have
removed $4,719 as an unsupported cost in Finding 2.
Comment 16 We disagree. Agency senior management stated in various interviews that it
would not report expenditures until the audit was complete to ensure funds
reported in HUD's system did not include ineligible expenses. In addition, its
quarterly progress reports were not posted prominently to its website after the
reports were submitted in HUD's system, as required. Instead, all of the quarterly
reports were posted on April 1, 2010.
Comment 17 We recognized and took into account the delays with access to the DRGR system.
36
Appendix C
CRITERIA
Public Law 110–289—JULY 30, 2008
Section 2301(c)(3)(A): Establish financing mechanisms for purchase and redevelopment
of foreclosed upon homes and residential properties…
Section 2301(c)(3)(B): Purchase and rehabilitate homes and residential properties that
have been abandoned or foreclosed upon, in order to sell, rent, or redevelop such homes
and properties.
Guidance on NSP [program]-Eligible Acquisition and Rehabilitation Activities obtained
from HUD’s Web site
NSP1 acquisitions are not authorized to begin until the grantee has submitted an action
plan amendment to HUD. For most NSP1 grantees, the earliest acquisition start date
would be December 1, 2008. For most NSP1 grantees, the earliest acquisition start date
would be December 1, 2008, but for those grantees that submitted an action plan
amendment prior to December 1, 2008, an earlier date could be acceptable.
In addition to submitting an action plan amendment, NSP1 grantees must comply with
the environmental review, purchase discount and other eligible-use criteria discussed in
the Guidance on Eligible uses prior to acquiring properties under NSP1. If the
acquisition is performed by a subrecipient, private developer or homebuyer, the grantee
must give permission or enter into an agreement prior [to] the acquisition.
Properties acquired out of foreclosure before these requirements have been met are not
eligible for NSP1 assistance.
Developers may not incur administrative costs but may charge fees and earn profits.
73 FR 58331
II. Alternative Requirements and Regulatory Waivers The NSP grant is a special
CDBG [Community Development Block Grant] allocation to address the problem of
abandoned and foreclosed homes.
II(A) Definitions for Purposes of the CDBG Neighborhood Stabilization Program
1. Abandoned. A home is abandoned when mortgage or tax foreclosure
proceedings have been initiated for that property, no mortgage or tax payments
have been made by the property owner [in] at least 90 days, and the property has
been vacant for at least 90 days.
2. Current market appraised value. The current market appraised value means
the value of a foreclosed upon home or residential property that is established
through an appraisal made in conformity with the appraisal requirements of the
URA [Uniform Relocation Assistance and Real Property Acquisition Policies
37
Act] at 49 CFR 24.103 and completed within 60 days prior to an offer made for
the property by a grantee, subrecipient, developer, or individual homebuyer.
3. Foreclosed. A property “has been foreclosed upon” at the point that, under state
or local law, the mortgage or tax foreclosure is complete. HUD generally will not
consider a foreclosure to be complete until after the title for the property has been
transferred from the former homeowner under some type of foreclosure
proceeding or transfer in lieu of foreclosure, in accordance with state or local law.
Paragraph H Eligibility and Allowable Costs (3)(b): HUD will not consider requests
to allow foreclosure prevention activities, or to allow demolition of structures that are not
blighted, or to allow purchase of residential properties and homes that have not been
abandoned or foreclosed upon as provided in HERA [the Act] and defined in this notice.
HUD does not have the authority to permit uses or activities not authorized by HERA.
Paragraph O Reporting (1)(b)(i): Each grantee must submit a quarterly performance
report, as HUD prescribes, no later than 30 days following the end of each quarter,
beginning 30 days after the completion of the first full calendar quarter after grant award
and continuing until the end of the 15th month after initial receipt of grant funds. In
addition to this quarterly performance reporting, each grantee will report monthly on its
NSP obligations and expenditures beginning 30 days after the end of the 15th month
following receipt of funds, and continuing until reported total obligations are equal to or
greater than the total NSP grant. After HUD has accepted a report from a grantee
showing such obligation of funds, the monthly reporting requirement will end and
quarterly reports will continue until all NSP funds (including program income) have been
expended and those expenditures are included in a report to HUD, or until HUD issues
other instructions….. Each report will include information about the uses of funds
including, but not limited to, the project name, activity, location, national objective, funds
budgeted and expended, the funding source and total amount of any non-NSP funds,
numbers of properties and housing units, beginning and ending dates of activities, and
numbers of low- and moderate-income persons or households benefiting. Reports must
be submitted using HUD’s web-based DRGR [reporting] system and, at the time of
submission, be posted prominently on the grantee’s official Web site.
74 FR 29225 The address, appraised value, purchase offer amount, and discount amount of each
property purchase must be documented in the grantee’s program records. As noted in the
discussion of the NSP purchase discount requirements, section 2301(d)(1) of HERA required
that the purchase price of a foreclosed upon home or residential property must reflect a discount
from the current market appraised value of the property. The October 6, 2008, notice defined
“current market appraised value” to mean the value of the property established through an
appraisal made in conformity with URA appraisal requirements.
38
Federal (HUD) regulations at 24 CFR
24 CFR Part 570
570.463(a) Pre-approval revisions to the application. Applicants must submit to the
HUD Area Office and to Central Office all revisions to the application. A revision is
considered significant if it alters the scope, location, or scale of the project or changes the
beneficiaries’ population. The applicant must hold at least one public hearing prior to
making a significant revision to the application.
570.463(b) Post preliminary approval amendments. Applicants receiving preliminary
approval must submit to the HUD Central Office, a request for approval of any
significant amendment. A copy of the request must also be submitted to the Area Office.
A significant amendment involves new activities or alterations thereof which will change
the scope, location, scale, or beneficiaries of such activities or which, as a result of a
number of smaller changes, add up to an amount that exceeds ten percent of the grant.
570.501(b) states that recipient is responsible for ensuring that CDBG funds are used in
accordance with all program requirements. The use of designated public agencies,
subrecipients, or contractors does not relieve the recipient of this responsibility. The
recipient is also responsible for determining the adequacy of performance under
subrecipient agreements and procurement contracts, and for taking appropriate actions
when performance problems arise…
570.506 require each recipient to establish and maintain sufficient records to enable the
[HUD] Secretary to determine whether the recipient has met the requirements of this part.
o (a) The recipient shall maintain records which will provide a full description of
each activity assisted with CDBG funds, including its location, the amount of
CDBG funds budgeted, obligated, and expended for the activity.
o (h) Recipients shall maintain evidence to support how the CDBG funds provided
to such entities are expended. Such documentation must include, to the extent
applicable, invoices, schedules containing comparisons of budgeted amounts and
actual expenditures, construction progress schedules signed by appropriate
parties, and/or other documentation appropriate to the nature of the activity.
24 CFR 58.30(b) states that the environmental review process should begin as soon as a
recipient determines the projected use of HUD assistance.
24 CFR 58.40(a) states that in preparing the environmental assessment for a particular project,
the responsible entity must determine existing conditions and describe the character, features and
resources of the project are and its surroundings…
24 CFR Part 85
24 CFR 85.20(b)(2) Accounting records. Grantees and subgrantees must maintain
records which adequately identify the source and application of funds provided for
39
financially-assisted activities. These records must contain information pertaining to grant
or subgrant awards and authorizations, obligations, unobligated balances, assets,
liabilities, outlays or expenditures, and income.
24 CFR 85.30(d) Grantees or subgrantees must obtain the prior approval of the
awarding agency whenever any of the following actions is anticipated:
o 24 CFR 85.30(d)(1) Any revision of the scope or objectives of the project
(regardless of whether there is an associated budget revision requiring prior
approval).
85.40(a) states that grantees are responsible for managing the day-to-day operations of
grant- and subgrant-supported activities. Grantees must monitor grant- and subgrant-
supported activities to assure compliance with applicable federal requirements and that
performance goals are being achieved. Grantee monitoring must cover each program,
function, or activity.
24 CFR 91.505 Amendments to the consolidated plan.
91.505(a) Amendments to the plan. The jurisdiction shall amend its approved plan
whenever it makes one of the following decisions:
o (3) To change the purpose, scope, location, or beneficiaries of an activity.
2 CFR 225
Appendix A of 2 CFR 225 (c)(1) states that to be allowable under federal awards, costs
must meet the following general criteria:
o a. Be necessary and reasonable for proper and efficient performance and
administration of Federal awards.
o j. Be adequately documented.
Appendix A of 2 CFR 225 (c)(2) A cost is reasonable if, in its nature and amount, it does
not exceed what a prudent person would incur under the circumstances prevailing at the
time the decision was made. In determining reasonableness of a given cost, consideration
shall be given to:
o a. Whether the cost is of a type generally recognized as ordinary and necessary for
the operation of the governmental unit or the performance of the federal award.
o b. The restraints or requirements imposed by such factors as: sound business
practices: arms length bargaining; federal, state, and other laws and regulations;
and terms and conditions of the federal award.
o c. Market prices for comparable goods or services.
o d. Whether the individuals concerned acted with prudence in the circumstances
considering their responsibilities to the governmental unit, its employees, the
public at large, and the federal government.
40
o e. Significant deviations from the established practices of the governmental unit
which may unjustifiably increase the Federal award’s cost.
Appendix B of 2 CFR 225 (h) Support of salaries and wages. These standards regarding
time distribution are in addition to the standards for payroll documentation.
o (1) Charges to Federal awards for salaries and wages, whether treated as direct or
indirect costs, will be based on payrolls documented in accordance with generally
accepted practice of the governmental unit and approved by a responsible
official(s) of the governmental unit.
OMB Circular A-133, Subpart C (.300b). The auditee shall: …(b) maintain internal control
over Federal programs that provides reasonable assurance that the auditee is managing
federal awards in compliance with laws, regulations, and the provisions of contracts or grant
agreements that could have a material effect on each of its Federal programs.
41
Sacramento Housing and Redevelopment Agency Did Not Always Administer the Neighborhood Stabilization Program in Accordance With HUD Rules and Regulations
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-06-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)